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KVB has staged a strong recovery over the past two years, from its corporate asset quality woes. Bank reported net credit growth of 16% YoY in FY23, mainly led by strong traction in the retail/agri/MSME portfolio. Within Retail, mortgages remain the key growth driver; Bank now plans to accelerate gold loan growth too. Separately, KVB targets to gradually scale-up the MFI book, for which it is building the right team/processes. That said, the bank believes that its growth strategy will be guided only by a favorable risk-reward ratio and it will, therefore, not chase growth without profitability.

We expect KVB to deliver the best RoA/RoE among peers, at 1.5%/15-16% over FY24-26E, with NIMs/fees and LLP being key drivers. We retain BUY, with revised TP of Rs165 (Rs155 earlier), factoring-in 4-6% earnings upgrade and valuing KVB at 1.2x FY25E ABV. KVB remains our preferred pick in the smallcap banking space, given superior returns/capital ratios and Mgmt credibility

Growth strategy to be guided by favorable risk-reward ratio

KVB is finally on a growth track, after a nearly sub-10% credit growth over FY15-22 due to Bank’s corporate de-bulking strategy, followed by MD resignation and Covid-induced disruption. With asset-quality issues now largely behind, Bank has clocked 16% YoY net credit growth; for FY24, it guides for a slightly lower number, as it believes in gradually pacing up growth amid macro dislocations, to avoid any accidents. Within Retail, Bank would retain focus on growing its mortgages/LAP portfolio, while also ramping-up its retail gold portfolio. Bank pulled the plugged on the personal loan front in FY23, but plans to focus on building a healthy MFI portfolio over time. MFI growth will be initially led by the BC model, while Bank is building its team/processes; it will accelerate growth once it gains confidence on the risk-reward front. Bank’s NEO (new & emerging opportunities) channel — armed with its own feet-on-street, underwriting and credit assessment teams — is helping expand customer acquisition in home loans/supply-chain financing; the bank has also tied-up with fintechs like Amazon, to source loans.

Healthy margins, contained cost ratios to help sustain core profitability

Bank has reasonable CASA ratio at 33%, which it nevertheless plans to gradually improve to 40% in the long run, equipped with a mix of physical + digital strategy and thus help sustain its healthy NIMs (>3.8-4%). After a long haul, the bank has decided to open 35 branches in FY24, and plans to thereafter build a formidable CASA base. Bank believes that a cluster-based approach would help it not only to ramp up its MSME asset book, but its CASA base as well. Cost-income ratio has come down, below its traditional range of 53-60%, which the bank aims to sustain at 45-50%, thus supporting KVB’s core RoA at 2.4-2.6% over FY24-26E.

Lower slippages, healthy PCR to limit incremental LLP

Bank has guided for contained slippages at 1% for FY24 which, coupled with better recovery/ w-offs, should lead to steady reduction in GNPA to below 2%. The SMA2 book stands at only 0.2%, while the RSA book too has declined, to 1.5% of loans, with limited risk of relapse. The bank carries healthy PCR at 68% (technical PCR at 92%), while it has guided for LLP at 75bps in FY24 vs 150bps in FY23. We have conservatively built-up a slightly higher PCR (70%) and hence LLP of 1%, factoring-in the incremental macro dislocation and Bank’s strategy to build some contingent buffer.

Attractive valuations, despite the run-up, make KVB a compelling BUY

With asset-quality stress and concerns around Management stability/credibility now largely behind, KVB is on course to reclaim the best RoA/RoE among peers, at ~1.5%/15-16% over FY24-26E, on a sustainable basis, led by better quality growth, NIMs/fees and contained LLP. This, coupled with the healthy capital ratio (CET 1: ~16.8%) and attractive valuation (0.8x FY25E ABV), makes KVB one of the preferred picks among small-cap banks. We retain BUY, with revised TP of Rs165/share (vs Rs155 earlier), valuing the bank at 1.2x FY25E ABV

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